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InterAmerican Seminar on Economics.

InterAmerican Seminar on Economics

The NBER's Second Annual InterAmerican Seminar on Economics, cosponsored by the Pontifica Universidade Catolica do Rio de Janeiro (PUC) and FEDESARROLLO, was held in Bogota, Colombia, on March 30-April 1. Sebastian Edwards, NBER and University of California at Los Angeles, and Edmar Bacha, PUC-Rio de Janeiro, organized the following program:

Opening Remarks: Luis Fernando Alarcon, Minister

of Finance, Colombia

Rudiger Dornbusch, NBER and MIT, and Sebastian

Edwards, "Economic Crises and the

Macroeconomics of Populism in Latin America: Lessons

from Chile and Peru" (NBER Working Paper No.


Discussants: Jose Pablo Arellano, CIEPLAN, and

Antonio Urdinola, ECLAC-Bogota

Edmar Bacha, "A Three-Gap Model of Foreign

Transfers and the GDP Growth in Developing Countries"

Discussants: Leonardo Villar, FEDESARROLLO,

and Daniel Heyman, ECLAS-Argentina

Raquel Fernandez, NBER and Boston University,

and Jacob Glazer, Boston University, "The Scope

for Collusive Behavior among Debtors in a

Model of Sovereign-Debt Renegotiation with Costly


Discussant: Mauricio Cabrera, former Head of Public

Credit, Colombia

Eduardo Borensztein, International Monetary Fund,

"Debt Overhang, Credit Rationing, and Investment"

Discussants: Patricia Correa, Banco de la Republica,

and Juan Jose Echavarria, FEDESARROLLO

Armando Montenegro, Advisor to the Monetary Board,

Colombia, "The Economics of a Regulated Export

Sector: Coffee in Colombia"

Discussants: Roberto Steiner, Banco de la Republica,

and Vinod Thomas, The World Bank

Edward E. Leamer, NBER and University of California

at Los Angeles, "Latin America as a Target of Trade

Barriers Erected by the Major Developed Countries

in 1983"

Discussant: Gustavo H.B. Franco, PUC-Rio de Janeiro

Jose Antonio Ocampo, FEDESARROLLO, "Import

Controls, Prices, and Economic Activity in


Discussants: Anne O. Krueger, NBER and Duke

University, and Ricardo Chica, FEDESARROLLO and

Universidad de los Andes

Salvador Valdes, Universidad Catolica de Chile,

"Export Drawbacks and Vertical Control"

Discussant: Alicia Puyana, CRESET

Aaron Tornell, Columbia University, "Real versus

Financial Investment: Can Tobin Taxes Eliminate

the Irreversibility Distortion?"

Discussant: Andres Velasco, Columbia University

Winston Fritsch and Gustavo H.B. Franco, PUC-Rio

de Janeiro, "Direct Foreign Investment and

Industrial Restructuring in Brazil"

Discussant: Astrid Martinez, Universidad Nacional

de Colombia

J. Saul Lizondo, Universidad de Tucuman, Argentina,

and Peter Montiel, International Monetary Fund,

"Dynamics of Devaluation and Equivalent Fiscal

Policies for a Small Country with Optimizing Agents"

Discussants: Manuel Ramirez, Universidad de los

Andes, and Alberto Carrasquilla, Banco de la


Raul Ramos, Banco de Mexico, "Real Wages and the

Transfer Problem: A Mexican Variation on an Old


Discussants: Geoffrey Carliner, NBER, and Alvaro

Reyes, CCRP

Alarcon began the meetings with a review of Latin America's debt problems. He emphasized that the problem was created jointly by foreign banks, creditor governments, and debtor governments. Since the onset of the crisis in 1982, most debtor countries have endured very stringent economic conditions. Alarcon suggested that a successful solution to the debt problem probably would also be a joint undertaking, including new credit provided by the IMF and The World Bank, regulatory accommodation by creditor governments, and responsible macroeconomic policies by debtor governments.

Dornbusch and Edwards first discuss the main characteristics of populist regimes in Latin America, emphasizing their reliance on macroeconomic policies to redistribute income. Then they define four phases historically observed in most populist experiments, including Chile in 1970-3 and Peru under Alan Garcia now. The first is characterized by demand-driven expansion of output. Pressures on inflation are dealt with through generalized price controls. In the second stage, bottlenecks appear and inflation increases significantly. The third phase is characterized by pervasive shortages, very high inflation, capital flight, and real wages that are significantly below their initial level. At this point, some timid and ineffective stabilization programs usually are tried. During the fourth phase, a new government tries to implement an orthodox stabilization program.

Bacha expands the traditional model of growth to include the fiscal gap as a third constraint on the growth of highly invested developing countries. This requires the assumptions that domestic capital markets for government bonds are very limited and that there is a strong complementarity in these countries between investment in private sector infrastructure and investment in the private sector. Bacha also studies the impact of net foreign transfers on economic growth and the price stability of fiscally constrained economies. Finally, he discusses the role of external conditionality accompanying debt relief measures.

Fernandez and Glazer examine the possibility of collusive behavior among countries negotiating their debts with the same bank. If the bank and the countries take turns making offers over time, a country will be motivated to reach an agreement if the bank imposes a penalty (restriction of trade credits) in each period in which an agreement is not reached. However, punishing a country is also costly to the bank. If countries are able to commit to a cartel, they can exploit the fact that penalizing two countries simultaneously is costlier to the bank than penalizing them one at a time. Thus, each country pays less than if it were the sole country negotiating with the bank. However, there is a unique equilibrium in which the bank is able to exploit each country's fear that the other country will reach an earlier agreement with the bank; this permits the bank to extract the same payment from each country as it would if there were only one country or if its cost function were linear.

Borensztein assesses the relative magnitude of two mechanisms through which foreign debt decreases productive investment the debt overhang and credit rationing. The debt overhang acts as a "tax" on production, while rationing implies higher domestic interest rates. However, the effect of credit rationing may be more powerful. This implies that additional lending would be a stronger (or cheaper) policy instrument than debt reductions from the point of view of increasing productive investment in debtor economies.

Montenegro presents a simple model of the Colombian coffee economy within the institutional framework established by the International Coffee Agreement. The real and financial aspects of coffee are specified separately, and Montenegro studies the handling of policy instruments. He also analyzes the conditions for the sector's stability and its static comparative properties. Finally, he explores the behavior of the Colombian coffee economy within organizational frameworks different from the International Coffee Agreement: that is, perfect competition and monopolistic competition.

According to a dataset collected by UNCTAD, Latin American exports are not subject to trade barriers as often as the exports of other regions, such as Australia/New Zealand and Japan. Leamer controls for differences in commodities to estimate the effects of trade barriers on Latin American exports. The two methods he uses lead to quite different results. For example, he finds that exports from Brazil, when compared to 14 imports, are suppressed by trade barriers either by 12 or by 46 percent. The larger estimate comes from accounting more accurately for differences in comparative advantage among the countries he considers.

Ocampo analyzes the effects of changes in Colombia's trade regime since 1976: substantial liberalization during 1976-81, then high restrictions from 1982 to 1985, and finally moderate liberalization since 1985. In his simple Keynesian model, GDP in the manufacturing and service sectors is determined by real aggregate demand, and domestic markets for traded goods are imperfectly competitive. Ocampo estimates that tighter restrictions on imports raised GDP by 4.4 percent between 1982:4 and 1985:2, while liberalization reduced GDP by 1 percent during the remainder of 1985. Since then, liberalization has had very small effects on output.

Valdes studies the export drawback regime that has been in force in Chile and the changes it has suffered lately. Export drawbacks refund value-added and excise taxes on Chilean imports. Valdes finds that the operating rules attached to the new drawback regime can lead to an increase in national welfare. However, this increase is limited because the detailed operating rules in effect limit the refunds to large monopolistic producers who sell to exporters. Small producers and exporters themselves are not able to obtain the refunds. Thus all of the benefits of this export scheme accrue to large monopolists.

In the recent past, several countries have failed to achieve significant real capital investment despite episodes of large capital inflows. Although real projects with seemingly high returns are available, investors prefer to wait for the correct time to invest. Tornell addresses this issue by considering a two-sector economy where investment in real capital is irreversible and financed by debt. Furthermore, the interest rate, which is determined in the financial sector, is random because of volatile expectations. In this economy the expected return on real capital is above the expected interest rate. This is because the option to wait for lower interest rates has a positive value. In the presence of rumors, taxes on international financial transactions (Tobin taxes) reduce the variance of the domestic interest rate, while leaving its mean unchanged. As a result, they induce more investment in irreversible real capital.

Fritsch and Franco review recent industrial policies in Brazil. They first explain how differential access to the technology can determine the northern NICs' patterns of trade in manufactures. They then address three issues: 1) the implications of shortening product cycles; 2) feasible levels of vertical integration; and 3) combinations of firm size and foreign participation that could enhance technology acquisition.

Lizondo and Montiel examine the effects of a nominal exchange rate devaluation, a temporary tax increase, and temporary reductions in government spending on traded and nontraded goods. They find that devaluations and temporary increases in taxes reduce private sector expenditure possibilities when compared with temporary reductions in public sector expenditure. Additional interest earnings transferred to the private sector increase its expenditure possibilities when compared with additional earnings used to increase public sector expenditure. In all cases, the implications for the real exchange rate and for the various accounts of the balance of payments depend on whether the changes in public sector expenditures take place in traded or in nontraded goods.

Ramos briefly summarizes changes in the Mexican economy since the onset of the debt crisis. Transfers to the rest of the world have averaged 6 percent of GDP annually. To finance these transfers, the real minimum wage fell 47 percent and the share of wages in GDP fell from 38 to 28 percent between 1981 and 1986. Government spending on everything but interest payments fell from 36 percent of GDP in 1982 to 25 percent in 1987. However, tax revenues remained stable at 10-11 percent of GDP. Ramos analyzes these changes with a two-good model in which the government raises revenues through taxes on labor and income and an inflation tax. In this model, the inflation tax depresses new investment. As the labor force grows more rapidly than the capital stock, real wages fall.
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Title Annotation:Conferences
Publication:NBER Reporter
Date:Jun 22, 1989
Previous Article:Second quarter 1989.
Next Article:Conference on Social Insurance.

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